10: Kinds of Capital
There is a distinction made between fixed and circulating capital, which attempts to distinguish between capital assets that will remain with a firm (such as buildings and machinery) and those that will not (such as materials, supplies, and finished goods) during a specific period of time.
There is very little practical difference between them, except that the circulating capital is expected to need to be replaced sooner and has a more immediate- relationship to the revenue of the firm. A factory will be purchased once in a hundred years, loom will be purchased once every ten years, whereas thread will be purchased each week. All contribute toward the production of cloth (and the revenue from the sale of that cloth), but the duration will vary.
Moreover, what is considered fixed to one firm is considered circulating to another. To the blacksmith, his anvil is fixed capital because it remains in his shop as equipment to make his goods. To the anvil-factory, anvils are circulating capital - the product they sell to their customers. And all capital eventually ceases to be capital when things are disposed of or otherwise consumed.
Money is the most liquid of capital, constantly passing from one hand to the next, but is meanwhile the least useful. Until it is spent on something, money creates no value. It is also noted that money spent on consumption is not considered to be capital - the part of the profit a carpenter spends on his rent and groceries is not working capital, but the part he uses to purchase wood or tools for his shop is. And he may arbitrarily decide at any time to shift his spending.
The qualification of "a specific period of time" is also a factor that makes the distinction less useful. Any tool will wear out and need to be replaced. Some will break within a month, others will last decades. Some goods will be sold right away, other goods will remain in inventory for a long period of time (consider the process of aging whisky - twelve- or twenty-year old Scotch remains in inventory for a very long time).
Another arbitrary division is made between productive and non-productive assets: the loom on which cloth is woven is deemed "productive" because of its necessity to create the product, but the cart on which it is conveyed to the market is not deemed productive because it does not transform materials into goods, but merely moves them. But if the goods were not moved from the factory to the market, they would earn no revenue - so it cannot be said that the cart has nothing to do with the profit. There's a further distinction between active assets (tools) and passive ones (materials), but this is likewise of little relevance.
In all, the distinction between fixed and circulating is often used to include or exclude certain parts of capital from consideration in the context of a given discussion - and this is in some instances useful, but it is often used in instances when the distinction is incidental (or even misleading). To the business-man who is mindful of his cash flows to ensure he has the liquid capital (money) to pay for things when he needs them, the distinction is quite important. To the banker seeking security for a loan, it is important. But for the most part, the distinction is immaterial and has sometimes led to the acceptance of absurd theories.
He then turns to the notion that there exists a "fund for the maintenance of labor" as some economists have asserted. Now it is true that an individual business manager must consider the expenses he must undertake to produce, and that some portion of those expenses are a projection of the wages that must be paid to workers. And if once considers in aggregate the funds that every employer in a market has set aside to pay workers, there does exist a large pool of funds to pay wages. But theorists go too far when they consider this to in isolation, asserting that an economy devotes capital to paying workers regardless of whether the workers are needed to produce goods, regardless of whether the goods are demanded by consumers. Clearly, this fund is a means to an end, not an end in itself.
This fallacy is also perpetrated on the demand side - in the belief that workers want money just to have it. Money is a tool of exchange, used to purchase needful and desirable things, and is only valuable if it is capable of doing so. In a situation in which there is a scarcity of goods, the allure of money is diminished. (EN: This also explains cultural issues even in the present day, as certain cultures have limited appetites and bonus pay has very little power to compel additional labor once the workers' basic needs are satisfied.)
Storage and transportation mean that production can be done long before and far away from consumption. From a business perspective, this gives the producer more power to choose when/where production takes place and when/where the goods are sold. It may be most efficient to produce in a month enough stock to sell for a year, or to refuse to sell stock until the market offers an acceptable price. Just-in-time local production does seem to be the general preference because capital is more quickly cycled and risk minimized when a producer does not need to keep goods for a long period of time or transport them over great distances - but there are instances in which it makes financial sense to do otherwise or when it is inevitable because of the nature of the material (particularly agricultural goods, which must be sown and harvested in their seasons).
The delay between sale and production has also led to a misunderstanding of the relationship between employers and laborers - that the wages paid to laborers are in some way disconnected from the revenue created from their work because, being paid before revenue is received, there can be no causal connection. This is incorrect: the wage is granted in advance in expectation of the profit that will be generated from the product of labor. In that sense it is similar to a loan given to a producer by a bank: the bank considers the profit not yet created to be collateral for the loan that is extended before production occurs.
In situations in which laborers are paid from the profits once goods are sold, the relationship between labor and wage is more clear. But most laborers lack the means to sustain themselves until they receive their share, and so their employer must lend them the money in advance.
(EN: There are quite a number of factors that cause confusion over wages - the temporal sequencing, the employer absorbing the risk , the receipt of wages for work that is not clearly linked to the product, the payment of wages for ill-conceived activities that are not productive, etc. In all, it's best simply to avoid those who do not recognize the connection between wage and profit - they are either ignorant or are feigning ignorance. It can be difficult to discern the difference.)